The Stages of Money Laundering: Placement

Placement is the first step in the money laundering process, in which launderers introduce dirty money into legitimate financial systems. Launderers use multiple complex methods to conduct placement, making it difficult to track sources of illegal funds. There are a number of far-reaching consequences of introducing dirty money into global financial systems, making it crucial that compliance professionals remain familiar with launderers’ methods and vigilant in their investigations.

Introduction

Money laundering is a deliberately complex process, intended to obfuscate the origins of dirty money and hide the identities of the people behind the schemes to make the funds appear legitimate. Unfortunately, it’s also incredibly lucrative – as much as $3.6 trillion is laundered annually around the world. Only 1% of it is ever seized by law enforcement.

The laundering process is broken up into three steps: placement, layering, and integration. In this first entry in a three-article series, we’ll take a deep dive into the placement stage, including what it is and techniques money launderers use to make it happen.

What is Placement?

Money launderers have a lot of cash laying around. And while cash is certainly still king, not every transaction can be done in bills – especially large purchases – without raising a lot of eyebrows by pulling out huge wads of money. It’s also much safer to keep cash in the bank, but banks also have a lot of processes in place to detect major deposits that could be signs of exactly the crimes money launderers engage in.

So how do launderers get their cash into banks or other accounts without bringing attention to their schemes? Through a method called placement.

Placement is the initial stage of the money laundering process, where the illicit funds enter legitimate financial systems. At this stage, the launderer seeks to convert the dirty money, derived from illegal activities such as drug trafficking, corruption, or fraud, into seemingly legitimate assets. The goal is to distance the funds from their illegal source and integrate them into the financial system without raising suspicion.

However, because cash has its many uses and the benefit of being untraceable, launderers usually don’t deposit all of their ill-gotten gains into accounts. Whether being used for bribes or paying off associates, keeping some cash on hand is ideal.

Methods Used to Conduct Placement

Money launderers use a number of different techniques to get their money into banks and shake law enforcement off their scent.

• Smurfing. This placement technique involves breaking down large sums of money into smaller, less conspicuous amounts. Launderers use multiple individuals, known as smurfs, to deposit these smaller amounts into various, geographically dispersed bank accounts (none of which are in Smurf Village). The sources of the illegal funds are usually obfuscated by dishonest bookkeeping or complex transactions.

• Structuring. Often used interchangeably with “smurfing,” structuring is a similar – but not identical – placement method. In structuring, the launderer makes numerous cash deposits under the reporting thresholds set by most financial institutions, usually across multiple banks. In the US and Canada, financial institutions must file a currency transaction report for cash transactions exceeding $10,000; structuring helps launderers stay under the radar and avoid the scrutiny attached to large transactions.

• Cash-based/cash-intensive businesses. What better way to hide cash than within piles of other cash? That’s the idea behind buying and operating cash-based or cash-intensive businesses, like laundromats, casinos, restaurants, bars, or convenience stores. With an influx of legitimate cash coming in from these businesses, launderers can then mix in their illegal funds, making it difficult to determine the true source of the dirty money.

• High-value purchases. From luxury cars to expensive jewelry to real estate, another placement technique sees money launderers first making high-priced purchases in cash, then selling what they bought, receiving payment for it electronically. The funds from the sale have now been introduced, or placed, into the financial system, effectively laundering the dirty money.

• Shell companies. Launderers will deposit their large sums of cash into the bank account of a fake business they own, then wire that money into the bank account of a real business that they also control. That money then appears as revenue for the real company. This scheme is especially common (and easier to pull off successfully) in countries and jurisdictions with lax financial regulations.

• Cryptocurrency transactions. In 2022, $23.8 billion in digital currency was transferred through illicit addresses. While much of that money was never physical cash and was attained through cybercrime, much of it was also cash that was then transferred into crypto. In some cases, this happens through peer-to-peer transactions where a seller is willing to trade crypto for cash. In others, launderers will use Bitcoin ATMs and exchanges to buy crypto using dirty money, especially unregulated exchanges or ATMs in locations with weak compliance. While crypto financial crime is a problem, crypto forensics tools have begun to make laundering money through crypto exchanges a much more difficult proposition.

The Implications of Placement

Once laundered money makes it into financial systems, the consequences are far reaching and have a major impact on society.

• Facilitating predicate crime. Successful placement provides criminals with a front for their funds that appears legitimate, enabling them to continue engaging in illegal activities – including dangerous or violent predicate crimes – without drawing suspicion.

• Weakening financial systems. Money laundering undermines the integrity and stability of financial institutions, making them vulnerable to abuse by criminals. It can erode public trust in financial systems, hinder economic growth, and increase the cost of doing business.

• Financing terrorism. Unabated laundering can be and is used to fund terrorism. This directly threatens the safety and well being of every person, especially areas of the world in which terrorism runs rampant. But it also enables terrorists and extremists to increase their reach and impact.

Wrap Up

Placement is the first step in organized money laundering, funneling illicit funds into legitimate financial systems. Understanding the various techniques used by launderers to place funds is essential for combating the pervasiveness of money laundering around the world and protecting the integrity of global financial systems.